Executive director at Kotak Investment Banking, S Ramesh says that FCCBs are not the flavour of the month and a lot of FCCBs do not have reset clauses. Almost all the FCCBs that were raised in the last few months will be now out of money.
He says that premiums on an average have been 30-50 per cent, a couple were done at 60 per cent. He adds that YTM has been hit as a result of the rising interest rates.
He advices corporates to keep a close watch on debt-equity while doing an FCCB because he looks at FCCBs as an opportunistic equity.
Excerpts from CNBC-TV18's exclusive interview with S Ramesh:
How has the world changed for FCCBs now in the light of the recent price crash?
When we looked at it yesterday and if I were to look at January to May end, then corporate India has seen $4 billion of issuances in FCCB.
Most of them happened between March, April and early part of May, before the sharp correction in the market, and almost all of them would be out of money just now.
Secondly, we have also had hardening of interest rates globally and to add to that, there has also been the rupee-dollar depreciation. So it is probably not seen as the flavour of the month now by most of the corporates.
What happens from here-on, on two perspectives; one, with reset clauses and second, typically how long out from after doing an issue, do people start panicking and saying that no, this won't be converted because the stock price is way below where mine arrived at premium?
We looked at a number of issues, which were done between December and May and it was surprising that barring two-three, a number of them did not have reset clauses. Some of them may have forced out conversion clauses a year and half to two out, and so this is something we need to note.
Having said that, this is a five year instrument and markets are currently having a correction, so I think one should wait for 18-24 months from the time the issuances are done, to see that as markets go up and volatility comes down, probably there will be an opportunity for investors to convert. I think that is the way a number of corporates will be looking at it.
For most of these FCCBs in the first four months, how much was the premium that they were enjoying traditionally?
I do not remember the numbers. But if you look at the issuances they have all varied between 30 per cent to 50 per cent, one or two of them have even done it to 60%. Just looking at the stock correction, now they are all at a discount, even the issuance price that it was at is at a discount.
Typically when we engage in discussions with corporates who are looking at FCCBs there is one important factor we tell corporates to keep an eyeball on, which is the debt equity. This is because we do look at FCCBs as an opportunistic equity and I think conservatively, they must keep an eyeball on their debt equity as they get into FCCBs.
This is because the worst case is that no conversion happens and they have to redeem it way out in the future. I do believe a number of the leading corporates do adopt this and they do look at the net equity before sizing the FCCB. One must be careful about this.
Is the cyclicality in the FCCBs seen because perhaps, some of the charm was that it's a global foot hold as well and the market was holding up, which is a plus?
Even if you look at the bond flows currently, I think the bond flows are high for the number of FCCB issuances done, which reflects that probably there is very little option value. They are significantly trading as bonds. And as markets probably gain a little sustenance, the direction changes. We will see this product coming back to the market in its own selective form.
Even if it did, would you expect to see lower premiums and what some of these companies did their FCCBs at?
More than the premiums, I would say that we do think that the yields may be higher, the YTM (yeild to maturity) may be higher. We did an analysis yesterday, just looking from December to May and it's no brainer that a lot of the yields have gone up steadily from 4.50-5 per cent, to about 6.50 per cent. So that clearly reflects that the global interest rate rise has taken its toll on the YTM for Indian issuers. I do think that this maybe a reality for a while now.
For investors of these companies who did FCCBs in May, have we reached the stage where investors should start worrying about whether these companies will be saddled with debt now, which they did not foresee earlier? Or it hasn't come to that yet?
I do not think it has come to that yet. FCCBs done by Indian companies one year back would have probably seen the money and many of them had got converted. But the last six months is an early stage as yet. I think the markets are in a sharp correction mode. So this may not be a juncture to evaluate that.Sensex Rise and Fall: Complete Coverage
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